City opted not to seek $2 million grant

San Diego faces a $56.7 million deficit in the budget year that will start in July, but city officials did not apply for federal money that would have lowered its annual costs for retiree health care by $2 million.

The city didn’t submit an application because it is currently in negotiations with its labor unions over changes to retirement health benefits that could significantly reduce the amount owed on the long-term debt, said Valerie VanDeweghe, the city’s deputy director for risk management. She said the city could have forced itself into a financial corner by agreeing to accept money.

“We’re looking at potentially cutting hundreds of millions of dollars off the future of retiree health through negotiations,” VanDeweghe said. “We couldn’t say ‘yes’ knowing that we were going down this path.”

Frank De Clercq, head of the city firefighters union, questioned the decision in a March 17 letter to VanDeweghe. He wanted to know why the city hadn’t followed the lead of other public entities that had applied, including the San Diego County Employees Retirement Association, the San Diego State University Foundation and the San Diego Unified Port District.

“Other plan sponsors have aggressively submitted applications to recover funds and reduce their retirees’ benefit costs,” De Clercq said. “While the city struggles to determine ways of effectively reducing retiree health care obligations, it seems irresponsible to overlook these available funds.”

De Clercq didn’t return a call Thursday for further comment.

About $5 billion in federal money is available under the Early Retiree Reinsurance Program, which reimburses employers for money they spend on health care for people who retire before age 65, when they will become eligible for Medicare.

Employers nationwide have until May 5 to apply for a reimbursement, but the program’s website says that available funds are nearly depleted.

If an application is approved, the program covers 80 percent of employee health claims between $15,000 and $90,000. Dependents of retirees would have also been covered.

If the city enters the program, VanDeweghe said it would have been required to continue paying the same amount of money into retiree health care as it does now — $32 million annually. She said agreeing to current funding levels didn’t make sense given the ongoing labor negotiations.

VanDeweghe also said a major factor in not applying was that the available money was expected to run out fast because every employer in the country is eligible.

“It was expected that $5 billion was going to go very quickly,” she said. “We did not just dismiss this and say, ‘We’re not going for this one.’ We did our homework on it.”

The city has a long-term shortfall of $1.36 billion in money available to pay expected retiree health benefits. A study released in September showed the city could shave between $400 million and $900 million off that shortfall by reducing benefits to varying levels.

A deal between city and labor leaders on changes to retiree health care is expected to be announced in the next few weeks.